Johnny Karate Toy Company’s Q1 2018 performance was below expectations and Q2 is not looking any better. CEO Andy Dwyer had promised high levels of growth to investors in the earnings call and has asked you, the CFO, to see how to make the financial statements look better to meet these promises. Sales are lower than expected and thus, inventory levels are running higher than anticipated.
Andy suggested canceling or holding off on “unnecessary” expenses until Q3, such as training, travel, marketing, maintenance, purchasing supplies, etc. He also asked you to review each expense item in the income statement and determine if some of the period costs could be reclassified as product costs.
How do you feel about Andy’s suggestions? Are these actions ethical or unethical and why? Why would Andy make these suggestions – what impact would they have on the financial statements?
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